TMI Blog2019 (6) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... framed u/s 144 and since the discrepancies were found in the income computation during the appeal hearing order passed by the Ld. CIT u/s. 264 - HELD THAT:- Since the assessments were framed u/s 144 and since the discrepancies were found in the income computation during the appeal hearing, therefore, the CIT(A) in our opinion, has absolute power to issue enhancement notice to the assessee in the instant case. Therefore, the various decisions relied by assessee that CIT(A) has no power to enhance assessment by bringing a new sources of income is not tenable under the facts and circumstances of the case. Thus enhancement notice issued by CIT(A) in the instant case is justified. However, we find from the order of the CIT(A) that while enhancing the income he has given a finding that no corroborative evidences were filed by the assessee to substantiate that the loss is genuine. Considering all we deem it proper to restore this issue to the file of the AO with a direction to give an opportunity to the assessee to substantiate with evidence to his satisfaction regarding the genuineness of the loss on account of purchase and sale of shares of group companies. order passed by the Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the assessee company has sold its share in the partnership firm M./s. Trishul Industries to M/s. Vatika Ltd. and its promoter Shri Anil Bhalla during the year. M/s. Trishul Industries holds 11 acres of land along the NH-8 and has license to set up and operate a resort cum hotel at this site. The details of acquisition and transfer of partnership share in the firm M/s. Trishul Industries has been narrated by the Assessing Officer which is as under :- a) On 15.06.05 M/s. MDLR Estates Private Ltd, M/s. MDLR Builders P. Ltd (M/s. MDLR Group companies) and Shri Gopal Kumar Goyal (CMD of MDLR Group of companies), entered into an agreement to sell with the existing partners of M/s. Trishul Industries, i.e. Shri Ravi Shankar, Shri S.C, Babber, Shri Satish Chandra Babber and Shri RL Kukreja for transfer of partnership share of the firm to MDLR Group of Companies as mentioned above. Total Payment of ₹ 19.2 Cr was made to four partners in lieu of transfer of partnership shares by them. ₹ 9,50,00,000/- was paid by M/s. MDLR Estates Pvt Ltd and ₹ 9,50,00,000/- was paid by M/s. MDLR Builders Pvt. Ltd. b) On 25.10.06 a deed of ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income Tax Act, 1961. The MDLR Group transferred partnership share held by it to Vatika Ltd and Anil Bhalla. This according to the Assessing Officer is covered well within the scope of transfer of capital assets defined in section 2(45) of the IT Act. h) The Assessing Officer noted that the deed of retirement dated 29.11.07 clearly states that in pursuance to the deed, rights, title and interests of the retiring partners i.e. MDLR Group have been transferred and money is being paid by Vatika Group in consideration for the rights, title and interests acquired by it. The rights, title and Interests referred to here, is a bundle of rights and interests which include the title to 11 Acres of land and license to operate and set up a hotel, held by M/s Trishul Industries. Thus by transferring the partnership share in the firm, the MDLR Group has transferred the rights, title, and interests held by it in the firm. These are capital assets within the meaning of section 2(14) and their transfer is transfer of capital assets u/s 2 (47) of the Income Tax Act,1961. The MDLR Group is therefore, liable to pay tax on capital gains earned on this transfer. i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable as income of the assessee company as share of partner in partnership firm is capital asset and on retirement of the firm there is capital gain which accrues to the assesse which is taxable as such. For the above proposition he relied on the decision of Hon ble Karnataka High Court of CIT Vs. Gurunath Talkies reported in 328 ITR 59 (Karnataka) and the decision of Hon ble Bombay High Court in the case of CIT Vs. A. K. Naik Associates reported in 265 ITR 346. He however noted from the retirement deed dated 28.11.2007 between M/s. MDLR Estate Private Limited, M/s. MDLR Builders Private Limited, Mr. Gopal Kumar, M/s. Vatika Limited and Mr. Anil Bhalla that sum infused by M/s. Vatika limited was ₹ 112,00,00,000/- and not ₹ 178.42 crores as held by the Assessing Officer. He, therefore, held that the sum paid by Vatika Limited to any other entity of MDLR Group cannot be a ground to bring to tax as capital gain in the hands of the assessee on transfer of shares in M/s. Trishul Industries. He, therefore, directed the Assessing Officer to exclude figure of ₹ 72.42 crores for computation of the capital gain in the hands of the assessee on transfer of shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble losses. According to the Ld. CIT(A) it is not a genuine loss since there is no corroborative evidence in this regard. He, therefore, directed the Assessing Officer to enhance the income of the assessee to this extent being the loss claimed by the assessee on account of purchase and sale of shares which is not allowable. 12. Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds of appeal :- Grounds of appeal Ground No. 1) That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in making a disallowance of ₹ 13,04,50,800/- representing the loss incurred on purchase and sale of shares. Tax effect ₹ 4,43,40,227/- Ground No. 1.1) That the learned Commissioner of Income Tax (Appeals) while making the aforesaid disallowance has acted in excess of jurisdiction and therefore, the same is beyond the scope and powers vested in the learned Commissioner of Income Tax (Appeals) under section 25 l(l)(a) of the Act. Linked ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sustainable Linked to ground Ground No. 2.2) That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition. Linked to ground no.2 Ground No. 2.3) That while upholding the addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law. Linked to ground no.2 Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the above, it be also held that enhancement of income by disallowing the loss claimed on purchase and sale of shares is also illegal, both on merits and even otherwise beyond the scope of powers of the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lal Vaidya Vs. CIT 55 ITR 400 (All) 11) CIT Vs. Kunamkulam Mill Board 257 ITR 544 (Ker) 16. Referring to the following decisions he submitted that there is no estoppel against statue and mere declaration of capital gain in the return cannot be a ground to make addition on account of short term capital gain :- 1. CIT Vs. Mahalaxmi Sugar Mills Co. Ltd. 160 ITR 920 (SC) 2. CIT Vs. Bharat General Reinsurance Ltd. Co. 81 ITR 303 (Del) 3. Vijay Gupta Vs. CIT 386 ITR 643 (Del) 4. DIT (E) Vs. Ahay G. Piramal Foundation 52 taxmann.com 226 (Del) 5. CIT Vidarbha and Marathwada Vs. Smt. Archana R. Dhanwatay 136 ITR 355 (Bom) 6. Nirmala L. Mehta Vs. A. Balasubramaniam 269 ITR 1 (Bom) 17. Referring to the following decisions he submitted that reconstitution of firm does not result into invocation of section 45 (4) :- 1. CIT Vs. P. N. panjawani 356 ITR 676 (Karnataka) 2. DCIT Vs. G. K.Enterprises 79 TTJ 82 (Mad) 18. Referring to the following decisions he submitted that taxability of sum received by firm is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lcutta) 9. CIT vs. BP Sherafuddin 399 ITR 524 (Kerela) 22. Referring to the following decisions he submitted that transactions entered into by two sister concerns cannot be a valid ground for addition :- 1. ITA No. 596/Kol/2011 M/s Pluto Finance (P) Ltd 2. ITA No. 1840/Mum/2005 Shri Jayesh P. Choksi v. ACIT 3. Zaheer Mauritius v. DIT (IT) 270 CTR 244 (Del) 4. ITA No. 729/Del/2011 M/s Consolidated Finvest Holding Ltd. v. Asstt. CIT 23. The Ld. DR on the other hand strongly relied on the order of the CIT(A) and submitted that there was non compliance by the assessee before the Assessing Officer during the original assessment proceedings for which order was passed u/s. 144 / 153 A on 21.12.2009. Similarly when the matter was set aside by the CIT u/s. 264 of the IT Act with a direction to the Assessing Officer to frame the assessment afresh, even then also there was total non compliance. She submitted that the Ld. CIT(A) has given valid reasons for bringing to tax the amount received by the assessee on account of relinquishment of its rights in the partnership firm. Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e retirement from the partnership firm is given by the Assessing Officer in his remand report dated 20.08.2018, copy of which is placed by the Ld. DR in the paper book and which is under :- As per Partnership Deed of M/s Trishul Industries dated 04.03.1985 On 04.03.1985 a partnership firm, named and styled as Trishul Industries had been formed by the following four partners: i) Shri Ravi Shanker ii) Shri Subhash Chandra Babbar iii) Shri Satish Chandra Babbar iv) Shri R. L. Kukreja and the firm acquired land measuring 11.28 acres for a cost of ₹ 11,41,895/-. As per Partnership Deed of M/s Trishul Industries dated 15.06.2005 An amount of ₹ 19.2 Crores in the firm Trishul Industries contributed by the following mentioned parties with an agreement: i) M/s MDLR Builders (P) Ltd. ii) M/s MDLR Estates (P) Ltd. iii) Sh. Gopal Kumar Goyal Therefore as per partnership deed of M/s Trishul Industries dated 25.10.2006 the all above mentioned parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artner) ( 47.5%) vi) M/s MDLR Builders (P) Ltd. (Sixth Partner) ( 47.5%) Vii) Shri Gopal Kumar Goyal (Seventh Partner) ( 5%) As per Partnership Deed of M/s Trishul Industries dated 22.11.2007 Out of three existing partner two new partners were entered and new profit and loss sharing ratio was as under: i) M/s. MDLR Estates (P) Ltd (First Party) Profit/ Loss sharing ratio 5% ii) M/s. MDLR Builders (P) Ltd (First Party) Profit/ Loss sharing ratio 5% iii) Sh. Gopal Kumar Goyal (First Party) Profit/ Loss sharing ratio 5% iv) M/s. Vatika Limited (second Party) Profit/ Loss sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid to a partner upon retirement, after taking accounts and upon deduction of liabilities does not involve an element of transfer within the meaning of section 2(47), Chief Justice P.N. Bhagwati (as the learned Judge then was) speaking for a Division Bench of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 dealt with the issue in the following observations:- ... When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. The Supreme Court held that what is envisaged on the retirement of a partner is merely his right to realise his interest and to receive its value. What is realised is the interest which the partner enjoys in the assets during the subsistence of the partnership by virtue of his status as a partner and in terms of the partnership agreement. Consequently, what the partner gets upon dissolution or upon retirement is the realisation of a pre-existing right or interest. The Supreme Court held that there was nothing strange in the law that a right or interest should exist in praesenti but its realisation or exercise should be postponed. The Supreme Court inter alia cited with approval the judgment of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) and held that there is no transfer upon the retirement of a partner upon the distribution of his share in the net assets of the firm. In CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 , the Supreme Court held, while affirming the principle laid down in Mohanbhai Pamabhai that when a partner retires from a partnership and the amount of his share in the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion received or accruing as a result of the transfer for the purpose of section 48. Ex facie subsection (4) of section 45 deals with a situation where there is a transfer of a capital asset by way of a distribution of capital assets on the dissolution of a firm or otherwise. Evidently, on the. admitted position before the Court, there is no transfer of a capital asset by way of a distribution of the capital assets, on a dissolution of the firm or otherwise in the facts of this case. What is to be b noted is that even in a situation where sub-section (4) of section 45 applies, profits or gains arising from the transfer are chargeable to tax as income of the firm. 26.2 We find, the Hon ble AP High Court in the case of Chalasani Venkateswara Rao Vs. ITO (supra) held that amount received by a partner in full and final settlement of its shares on dissolution of the firm does not result in transfer. The relevant observation of the Hon ble High Court reads as under :- 19. In Bankey Lai Vaidya (supra), the Supreme Court held that a partner in a firm (carrying on business of manufacturing and selling pharmaceutical products and literature rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e both of them stand on the same footing. 21. In PH. Patel (supra), a Division Bench of the AP High Court noticed that the judgment in Mohanbhai Pamabhai (supra) was approved by the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 and following the judgment in L. Raghukumar (supra) held that when a partner retires from a partnership firm taking his share of partnership interest, no element of transfer of interest in the partnership asset by the retiring partner to the continuing partner was involved. 22. In the light of the above decisions, which are binding on us, we hold that the l.T.A.T. was not correct in confirming the orders passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid ₹ 15.00 lakhs by Y. Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, mere was no transfer as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y. Kalyana Sundaram is towards the full and final settlement of his share and such adjustment of his right is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of CIT Vs. Dynamic Enterprises (supra). We find due to conflicting decisions of the same High Court, the following substantial questions of law were framed with the following observations :- A division bench of this court felt that there is a conflict between the proposition of law laid down in the case of CIT Vs. Mangalore Ganesh Beedi works [2004] 265 ITR 658/136 Taxman 42 (Kar.) and in the case of CIT Vs. Gurunath Talkies [2010] 328 ITR 59 /189 Taxman 171 (kar.) in order to resolve the said conflict, passed an order on 27.08.2013 directing the matter to be listed before the Bench. Substantial question of law The substantial question of law referred for our consideration are as under :- When a retiring partners takes only the money towards the value of his share, whether the firm should be made liable to pay capital gains even when there is no distribution of capital asset/ assets among the partners Or Whether the retiring partner would be liable to pay for the capital gains ? 28. We find the Hon ble High Court decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual partners. No individual partners brought that ital asset as capital contribution into the firm. Five partners brought /in cash by way of capital when the firm' reconstituted on 28.04.1993. Nearly a year thereafter on 01.04.1994 by way of retirement, the erstwhile three partners took their, share in the partnership asset and went out of the partnership. After the retirement of three partners, the partnership continued to exist and the business was carried on by the remaining five partners. There no dissolution of the firm, or at any rate there was no distribution of capital asset on 01.04.1994 when three partners retired from the partnership firm. What was given to the retiring partners-is cash representing the value of retirement share in the partnership. No capital asset was transferred on the date of retirement under the deed of retirement deed dated 0l.04.1994. In the absence of distribution of capital asset and in the absence of transfer of capital asset in favour of the retiring partners, no profit or gain arose in the hands of the partnership firm. Therefore, the question of the firm being assessed under Section 45 (4) and charging them tax for the profits or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonably required by the party entitled to such transfer would be effected. It is based on this document and subsequent deeds of retirement of partnership that the order of assessment was made holding that the assessees are liable for tax on capital gains. . 28. In that context, the Bombay High Court held that when the assets of the partnership is transferred to a retiring partner, the partnership which is assessable to tax ceases to have a right or its right in the property stands distinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of Section 45. Once that be the case, the transfer of assets of the partnership to the retiring partners would amount to the transfer of capital assets in the nature of capital gains and business profits which is chargeable to tax under Section 45(4) of the Income Tax Act. In that context, it was held the word otherwise takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner. It is in this context the Bombay High Court held that Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee and against the revenue. ( ii) Consequently, the appeal stands dismissed ( iii) No costs. Therefore, the decisions relied on by Ld. CIT(A) are distinguishable and not applicable to the facts of the present case. 29. The various other decisions relied on by Ld. Counsel for the assessee also support his case to the proposition that amount paid to partner on retirement does not involve an element of transfer within the meaning of section 2 (47). 30. Respectively following the above decisions cited (supra) we hold that the assessee is not liable to any capital gain tax on account of the sum received by it as a partner on retirement from the partnership firm. The order of the CIT(A) on this issue is accordingly set aside and the Assessing Officer is directed to delete the addition of ₹ 43,49,47,500/- sustained by the CIT(A). 31. The grounds of appeal No. 2 to 2.3 are accordingly allowed. 32. So far as the ground No. 1 to 1.4 are concerned the same relate to the order of the CIT(A) in making a disallowance of ₹ 13,04,50,800/- repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfaction regarding the genuineness of the loss of ₹ 13,04,95,600/- on account of purchase and sale of shares of group companies. Needless to say the Assessing officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds of appeal No. 1 to 1.4 are accordingly allowed for statistical purpose. 33. In the result, the appeal filed by the assessee is allowed for statistical purpose. ITA No. 8215/Del/2018 (MDLR Estate Private Limited) The assessee raised following grounds of appeal :- Grounds of Appeal Tax Effect Ground No. 1 ) That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in making a disallowance of ₹ 13,04,94,600/- representing the loss incurred on purchase and sale of shares ₹ 4,43,55,115/- Ground No.1.1)That the learned Commissioner of Income Tax (Appeals) while making the aforesaid disallowance has acted in excess of juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upholding the inclusion, has failed to appreciate that no capital gain arose to the on retirement from the partnership firm and hence addition so made and sustained is invalid and therefore, unsustainable. L inked to ground no.2 Ground No. 2.2) That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that there is no estoppel against statute and mere declaration in the capital gain could not be a ground to sustain any addition. Linked to ground no. 2 Ground No. 2.3)That while upholding the addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate the evidence placed on record alongwith judicial pronouncements to submit that addition made and sustained is not in accordance with law. Linked to ground no.2 Prayer It is therefore, prayed that it be held that sum received on account of retirement from the partnership firm was not assessable as income and therefore ought to have been excluded while computing income of the appellant company. Apart from the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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